This article is part of Morningstar’s Guide to Income Investing. Whether you are looking grow your pension pot, or invest for retirement income, this week we have all the news, information and education you need.
Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and I'm joined today by Ben Lofthouse from the Henderson International Income Trust (HINT) to give his three stock picks.
Hi, Ben.
Ben Lofthouse: Good morning.
Wall: So what's the first company today?
Lofthouse: Well, I'll just set the scene by saying what we look for are well-invested companies that generate good free cash flow, that can pay their dividend and invest. So we like them where there's a little bit of maybe uncertainty or a contrarian aspect. So, let's say, we are value, but not deep value.
So with that in mind the first stock is General Electric (GE). We've held this in the portfolio for a few years now. It is restructuring. It's built up a very large – it's a world-class industrial company; it does turbines, engines for planes, locomotives, you name it. But it also had a very big finance area and that grew significantly before the crisis in this current environment with a higher capital requirements, it's not profitable, as it was and the company to its credit is winding that down and selling it.
They're getting some very attractive prices. And I think at the end of it you'll see a very good total return. The dividend is 3.4%, it's very well covered, it's been growing fast. And just yesterday somebody else saw the light and an activist investors got involved as well. So that's – it's in our top 10 and that's one of my key picks.
Wall: Would it then be time to sell if its asset stripping now after the sale of that financial sector or is this one of these income stocks one holds for decades?
Lofthouse: I think it's potentially one that you hold for decades. I think when you actually – one of the things that the financial division does at the moment is hide how good the industrial part of the business is. The management team there are very focused on making the profitability of the industrial business higher. And I think it's one of those leaders – it's one of those global leaders that actually has a lot of competitive advantage from its scale. So for me actually we're at the start, so we're in the first half of the transformation and it's doing this without even a very good operating environment.
Wall: And what's the second company?
Lofthouse: So the second company is slightly different, it's Novartis (NVS). So it's a large pharmaceutical company, it's in the top 10 as well. I think again this stock has performed well and one of the reasons I highlighted is 4 or 5 years ago, the pharmaceutical sector was very unloved. We took a large weighting in the sector and it's performed well and the temptation is to move on.
I think what's interesting about Novartis is they had a management change 18 months ago. They for many years weren't perhaps as focused on profit as they could have been. And management team are focusing now more on profit. They have a drug pipeline that's coming through very strongly. But also interestingly for pharmaceutical company, they have a company called Sandoz, which makes generics. So actually this pressure from the regulators and from healthcare providers to try and reduce the costs of drugs they have one of the best companies in the world that are providing those alternatives. And then to add to that they've got one of the world-leading eye care division.
So if you look at the cash it is generating, potentially in the few years it is got net cash, it yields 3%. I just think actually it is not a bad place to be in this environment.
Wall: Sounds quite diversified.
Lofthouse: Yes, it is.
Wall: What's the third company then?
Lofthouse: The third company much smaller, it's sort of €4 billion market cap. It is company called Eurocommercial Properties (ECMPA), and so it is a REIT, it is a real estate investment trust, yields almost 5% and it does European shopping malls, which as you can imagine haven't had the best time in the most recent years. It has relatively high quality portfolio and it operates from Netherlands, France, Italy. We are starting to see a pick-up in some of those countries, so actually Italian consumer confidence is looking better.
But the main reason I think it's interesting is what we have seen in other countries when interest rates fall very significantly is actually the value of property goes up. And it takes a while for the market to react to that. So at the moment it is trading around book value and the property yields are 5% to 6% on these very well let, so 98% occupancy shopping malls.
I think by the time this is out – when French bonds – 10-year bonds are sub-1% at the moment, German 10-year bonds are sub-1% I think it just looks like a very attractive asset.
Wall: Ben, thank you very much.
Lofthouse: Thank you very much.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
